Private Equity News & Analysis

30 Big Ideas Shaping ESG: Due diligence

Leading by example and setting out a clear set of principles for portfolio companies and the GP itself are important.

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Diligencing target company ethics

Investindustrial

The challenge: How to put ethical considerations at the heart of ESG.

The approach: While conducting ESG due diligence on a target investment has become commonplace, the UK-based GP has gone a step further to create a proprietary methodology to spotlight potential ethical, integrity and reputational issues. Using metrics and other tools to collect ethics and culture data, this information is presented to the investment committee as part of initial and final investment recommendations. The evaluation considers seven separate metrics: transparency, integrity track record, respect, inclusion and fairness, ethical role modelling, policies and incentives.

Investindustrial says: “Not only is a strong focus on business integrity likely to reduce the costs of misconduct, but it can afford companies a solid corporate reputation, genuine employee engagement, robust governance and even increased profitability.”

We say: The firm is one step ahead in recognising the impact culture and internal business ethics can have on financial performance.

Vetting how portfolio companies act

Wafra

The challenge: A diligence process that aligns LPs and GPs on ESG.

The approach: There is power in collaboration. The Constellation Platform is an initiative to invest in alternative investment firms backed by advisor Wafra, the Alaska Permanent Fund Corporation, RPMI Railpen and the Public Institution for Social Security of Kuwait. At its core is a mission to educate, train and support portfolio companies on the integration of sector-specific ESG frameworks by applying proprietary ESG due diligence methodology. Drawing on the platform LPs’ ESG priorities, values and vision, Wafra works closely with investee asset management businesses to accelerate the adoption of ESG best practice.

Wafra says: “Robust ESG diligence must also include thorough vetting of the way portfolio companies select, manage and direct their own underlying investments.”

We say: A good example of how collaboration can improve the diligence process.